Rand rallies on back of rate hike
THE RAND rallied more than 1 percent on Friday to trade below the R14 level as the currency drew strength from Thursday’s surprise interest rate hike by the Reserve Bank.
The currency hit its best level of R13.89 against the dollar during Friday’s trading. Higher interest rates make the rand attractive as investors chase higher-yielding assets.
The bank surprised the markets by raising interest rates when most economists and other market commentators had expected rates to remain unchanged.
The bank said it raised the interest rate to contain rising inflationary pressures as the drought was likely to push food prices higher, while pressure from looming electricity tariff increases would also dim the policy for the first time in almost a decade, reducing the appeal of riskier, emergingmarket assets.
“The MPC had to decide whether to act now or later,” Kganyago told reporters in Pretoria after predicting the Fed will probably raise its rate next month.
“Delaying the adjustment further could lead to secondround effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth.” inflation picture.
The hike also gives the rand a buffer in the run-up to what is expected to be the first interest rate increase by the Federal Reserve in December since the 2008 crash. – Staff Reporter
While inflation accelerated to 4.7 percent in October, it remains inside the bank’s target range, and is only forecast to breach that band temporarily in 2016. At the same time, the economy is struggling in the face of falling metal prices, a power shortage and drought, with gross domestic product contracting an annualised 1.3 percent in the second quarter. The Reserve Bank lowered this year’s growth forecast to 1.4 percent and estimates expansion of 1.5 percent in 2016.
“South Africa does not have an inflation problem,” Elize Kruger, an economist at KADD Capital in Johannesburg, said in a note to clients.
“But we have a very real growth problem, which is likely to be impacted negatively by the decision, even if marginally, and will definitely dent consumer confidence and resultant festive season spending.”
Brian Kahn, an MPC member and adviser to Kganyago, told reporters the increase was projected to reduce the annual gross domestic product growth rate by 0.1 percentage point.
The rate increase might help to underpin the rand before the Fed meeting, said Peter Kent, a portfolio manager at Investec Asset Management in Cape Town.
The hike was favoured by four of the six MPC members, while two called for the rate to stay unchanged.
“The hawkish tone of the SARB leaves no room for doubt it intends hiking interest rates at the expense of economic growth,” Mohammed Nalla, the head of strategic research at Nedbank Group, said.
“The decision was a little counter-intuitive. I just don’t understand the rationale for hiking at this particular meeting.” – Bloomberg